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Russia: Will The Ruble Go The Czech Or Thai Route?

Moscow, 26 September 1997 (RFE/RL) - The new buzzword these days in emerging market finance circles is "currency crisis" -- who's got one, who is doomed to face one, and how to avoid one. So where does Russia stand?

At the annual meetings of the International Monetary Fund/World Bank in Hong Kong this week, the fading roar of the Southeast Asian tiger economies, faced with faltering currencies, dominated the agenda.

First Deputy Prime Minister Anatoly Chubais expressed glee at the meetings that the Russian economy was no longer the focus of scrutiny at the meetings. Most economists agree that the conditions for a currency crisis do not yet exist in Russia, but the scenarios for a speculative attack on the ruble are there.

Peter Boone, an economist with the London School of Economics, says the most important trouble sign for Russia down the road would be a continuation of the government's relatively large budget deficit, which stood at 8.1 percent of gross domestic product in the first half of 1997.

"This is one of the highest in the world," Boone said at a press conference earlier this week. He noted that there are high hopes the government will sort out its finances with the 1998 budget, but if not, a dangerous buildup in debt could rattle the nerves of investors who have poured money into the government bond market, making the ruble vulnerable to a speculative attack.

Chubais acknowledged in Hong Kong that a currency crisis could rear its ugly head in Russia unless the government acts now. Mindful of the Southeast Asian crises, he said expectations of rising capital inflows into the country could force the government to reconsider its currency policy, a suggestion that Central Bank Chair Sergei Dubinin dismissed as more hypothetical than real.

Currency crises are nothing new for Russia. The ruble lost almost a third of its value in 1994 in what is now known as "Black Tuesday." Since then, the Central Bank has carefully managed the currency through its crawling peg policy, which is designed to gradually depreciate the ruble within defined corridor according to inflation.

Despite Chubais' cryptic statements, most believe Russia will continue to maintain a stable ruble policy.

Brigitte Granville, chief economist for Russia at J.P. Morgan in London, says the Central Bank will probably still keep the same exchange rate system, but with wider bands to allow the ruble to appreciate in real terms.

"The wider band will allow for more flexibility," she said.

What many observers express concern over is a major change in Russia's current account balance, which is a measure of the amount of money coming in and going out of the country. A fall in exports coupled with large capital inflows fueled by domestic demand caused both the Thai and Czech economies to run dangerously high current account deficits. This attracted the attention of hedge funds who decided to speculate against both currencies earlier this year. Both governments spent billions of dollars to defend the currencies in vain.

Boone says there are some key differences between Russia and Thailand or the Czech Republic. For one, Russia actually ran a current account surplus of about 2 percent of gross domestic product last year, powered by strong exports that have outpaced imports for the past four years. But a fall in world energy prices could hit Russia hard, as half of its exports are energy related.

And Russia has a very low level of debt compared to the tottering Southeast Asian economies, where banks stepped in to meet demand by dolling out credits, recklessly according to many.

As Chubais indicated, capital flight appears to be slowing down from the heady levels of previous years, while foreign money has poured into Russia's stock market. In the first half of 1997 alone, foreign investment reached $6.7 billion, three times more than a year earlier. While these are positive signs that the Russian economy may be on the road to recovery, they have also put pressure on the ruble to appreciate in real terms.

This has caused the Central Bank's reserves to skyrocket to an all-time high of nearly 25 billion. That figure alone is a sign that monetary authorities have deep enough pockets to defend the ruble against any speculative attack.

According to some, the Central Bank is beginning to adopt a more nuanced currency policy. Investment bank Renaissance Capital wrote in a recent research note: "For the first time ever, CBR officials are professing that they have no absolutely binding, short-term commitment to a certain value of the ruble, with only the year-end currency corridor rates (rubles 5750-6350/U.S. dollar) obligatory."

It said: "The unannounced shift in emphasis seems to be a recognition that, under certain circumstances, it is better to introduce some flexibility into exchange policy than to deplete foreign exchange reserves in an often vain effort to defend a more-or-less fixed regime, as recent exchange rate experience has shown."